Monetary Policy

The US dollar lost momentum yesterday but has regained it today. The euro has been pushed through last week's lows near $1.1180. The next immediate target is $1.1145, which corresponds to the lower Bollinger Band today, though the intraday technical readings suggest some modest upticks are likely first. The $1.1200-$1.1220 area may cap upticks.

The US dollar’s weakness in recent months, despite negative interest rates in Europe and Japan likely had many contributing factors. These factors include shifting views of Fed policy, weaker US growth, the recovery in commodity prices, including oil, gold and iron ore, and market positioning.

We felt strongly that the FOMC minutes would be more hawkish than the statement that followed the meeting, and we were not disappointed. However, our caveat remains the minutes dilute the signal that emanates from the Fed's leadership, Yellen, Fischer, and Dudley.

The Great Financial Crisis has exposed a deep chasm in economics and economic policy. In no single institution is this crystallized more than at the Bank of Japan. The former Governor, Shirakawa brought policy rates to nearly zero to combat deflation. His successor, Kuroda, took the central bank in the completely other direction. He has introduced three elements of unconventional policy in an institution that was wedded to orthodoxy.

On 29 January 2016, the Bank of Japan (BoJ) announced its monetary policy for the New Year: quantitative and qualitative monetary easing with a negative interest rate. The policy came as a surprise to money markets. The Nikkei index went up by over 800 points in two days and the yen depreciated sharply against the US dollar.

However, the BoJ is not the first central bank to adopt a negative interest rate target, negative interest rate strategies remain unfamiliar territory to macroeconomists.

This Great Graphic was posted by Hale Stewart on Seeking Alpha. It draws on US government data to show the increase in the median asking rent for vacant units since 1995. There are other measures of rent, including rent on primary residences. However, what is important is the trend.

The Bank of Japan defied expectations and its economic assessment to leave policy unchanged. The inaction spurred a 3% rally in the yen and an even larger slump in stocks. The financial sector took its the hardest and dropped almost 6%. The yen's surge helped underpin other Asian currencies, especially the South Korean won, which gained nearly 1%.

The FOMC delivered a statement largely as expected. It upgraded its assessment of the global economy by dropping the reference to risks. It downgraded its assessment of the domestic economy by acknowledging that growth has slowed.

The gains the US dollar registered in the second half are being pared, but it is sterling's strength that stands out. It is difficult to attribute it to Obama's push against Brexit, but there does appear to have been a change in sentiment.